All year the US Federal Reserve had hinted that it planned to raise interest rates in September. But when the day came to make the announcement, the Federal Open Market Committee, the Fed’s policy board, did nothing.

The FOMC said it put off raising rates because of instability in global markets, instability the Fed itself had created. Despite this, Fed Chair Janet Yellen said she expects the Fed to raise rates in December.

Asia Unhedged doesn’t see how the Fed can achieve this. Global deflation is rampant and central banks throughout the world are looking at more monetary easing. Taiwan, Norway and Hungary did it last week. The European Central Bank and the Bank of Japan are expected to ease by the end of October. And we would hope that the People’s Bank of China follows the crowd, but that seems unlikely.

That’s because one of the few things China has in common with the US is that its monetary policy this year has been as indecisive and incoherent as the Fed’s.

Any moves to ease next month could create the financial conditions for building a bottom to the decline in global economic growth. However, we believe that the major central banks of the world, led by Europe and China, and eventually the Fed, will respond to the risk of global economic contraction by more easing later this year.

The faster pace of quantitative easing by the ECB will give a new tailwind to European markets. On that assumption, Asia Unhedged thinks it’s time to start making cautions purchases of equities in Europe and China.

The rising dollar, the result of the Fed talking up rates, has hurt European exports. Most market watchers, including Asia Unhedged, believe that the ECB will increase its quantitative easing sooner rather than later. This should help European equities.

Meanwhile, the Hong Kong stocks of major Chinese banks have fallen about 40% from their April peak. They are now trading at a price-earnings ratio of less than 5%. That is stupid cheap. While the Chinese banks have issues with non-performing loans, these issues don’t justify such low valuations in an economy that is still expanding.

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